After ignoring warnings, govt can't play hardball

Nearly six years after India faced its last economic crisis because of US taper tantrums, the economy appears to be witnessing its worst time. Though analysts cite the ill-executed demonetisation, ill-timed introduction of the Goods and Services Tax (GST) and global factors like subdued global consumption and an increasingly protectionist environment, the government had always refused to admit the reality. Now that it has taken note of the gravity of the problem, it does not seem to have any clue on how to resolve it.

The government did not learn its lessons from a near-crisis in 2013 that caused investor pullout in anticipation of the US Fed capping its dollar infusion. Instead of using record low oil prices from 2014 to boost consumption, it struck a blow to consumers with its ill-executed note ban of 2016. Just eight months thereafter, it hurriedly rolled out a disruptive GST, apparently in the hope that this indirect tax reform would swell its coffers as the Value Added Tax (VAT) did years ago in 2005. However, it failed to appreciate the changed global conditions and did not take into account the impact of demonetisation on the economy.

The effect of this poor judgment is for all to see: The GST collection in September recorded a 19-month-low of Rs 91,916 crores. The growth of the country’s Gross Domestic Product (GDP) declined to five per cent in the April-June quarter of the current financial year. Automobile sales are in decline for several months. The core sector — consisting of eight key sectors in infrastructure — witnessed a negative growth of 0.5 per cent in August. Its ripple effect could be seen in the Index in Industrial Production for August, which shrunk by 1.1 per cent — the lowest since 2012. Worryingly, manufacturing has shrunk by 27 per cent. The logical corollary of this is that there would be no immediate job creation. Consumer durables production has also contracted by nine per cent, which means people are postponing spending — a development that could discourage companies from spending on new projects or adding new jobs.

After spending years in denial, the government has started taking steps to put money back in the hands of corporates by slashing corporate tax. There is also speculation that it could slash income tax rates to leave more money with people and thereby start a cycle of consumption, investment, jobs, and again consumption. This seemed like a well-conceived plan to take India out of slowdown mode. However, the GST Council decided on Friday to appoint a committee to recommend measures to increase indirect collections, including anti-evasion measures. This appears to be a decision taken in panic because of a shocking decline in GST collections in September. There are also reports of the CBDT asking its officers to increase tax collections. However, while the government should take all steps to collect the tax which is due to it, any hardball tactics in the current environment could be counter-productive. The immediate task for the government is to have a singular focus on improving investment and inspire confidence among people about their future.